Types of Compensation Plans

Competitive pay and compensation can help you attract and retain top talent from around the world. It can also drive higher levels of employee engagement and productivity at your organization.

So, how can you construct enticing compensation plans? To start, you need to understand the different types of compensation and their value to employees.

In this article, we’ll break down ten common types of compensation, from direct vs. indirect compensation. We’ll also explain how you can construct a compelling compensation strategy for your global workforce.

Direct Compensation (4 Types)

The first four types of compensation fall into the category of direct compensation, which is defined as some type of monetary payment.

Let’s take a closer look at these compensation types:

#1 Base Pay

Base pay is the initial amount that an employee is owed for their contributions. It can take the form of an hourly rate or annual or monthly salary:

Hourly wages – An hourly wage is a specific amount you pay an employee per hour. Full-time work for hourly workers is typically considered 40 hours per week. If employees work more than that, they may be entitled to an elevated hourly rate, known as overtime pay. If you pay your employees hourly, you’ll need to have reliable time-tracking methods in place. You’ll also need to adhere to any minimum wage laws and overtime pay regulations that apply to your remote employees’ locations.
Salaries – An annual salary is a fixed amount that an employee is paid per month or year, no matter how many hours they work within that time. Generally, salaried employees are not paid overtime if they work beyond a 40-hour workweek, though there are some exceptions. Salaries are often reserved for full-time employees with higher rankings within a company, such as managers and executives.

No matter which pay structure you choose, it’s important to pay your employees well. After all, 96% of workers who look for new positions do so to obtain higher base pay.¹

#2 Sales Commission

Commission is a form of compensation that’s common in sales roles. It ties employees’ earnings to their achievement of specific sales quotas or performance targets. The better an employee’s performance, the higher their commission earnings.

While some commission-based employees receive a base salary, many are compensated solely by their commission. The right pay structure will depend on the percentage of your employees’ work that’s related to reaching their performance quotas.

#3 Bonuses

A bonus is a form of financial compensation that’s added to an employee’s base pay. Here are some popular types of bonuses:

Signing bonuses are designed to entice sought-after candidates to accept a company’s job offer.
Performance bonuses are awarded to employees, teams, or departments that showcase excellent job performance.
Referral bonuses are given to employees who refer valuable customers, clients, or job candidates to their company, giving them an incentive to look out for worthwhile contenders.
Retention bonuses are designed to inspire loyalty in employees during challenging economies or company restructuring.
Holiday bonuses are distributed during the holiday season as a token of appreciation. In some countries, such as Mexico, providing holiday bonuses is mandated by law.²

While cash bonuses are quite common, bonuses can also take the form of gifts, gift certificates, company stock, and stock options.

#4 Tips

In the service industry, tips are a popular type of monetary compensation. They can come in two different forms:

Optional tips are paid by customers based on their satisfaction with a service. Their purpose is to incentivize workers to provide excellent service.
Mandated tips are charged to customers upon payment as a fixed gratuity fee.

Tipping is more prominent in some countries than others. For instance, in the United States, tips can make up a considerable portion of service workers’ pay. Whereas in France, tipping isn’t an expected thing—you may tip for exceptional service.

If your employees earn tips, you should take that into account as you build the rest of their compensation package. You must also determine if you’re legally obligated to pool your company’s tips and distribute them evenly among employees.

Indirect Compensation (5 Types)

While direct compensation involves the exchange of money, indirect compensation provides employees with non-financial compensation that may or may not possess monetary value.

Here are some examples of indirect compensation:

#5 Employee Benefits

Employee benefits encompass a wide array of employment perks, including:

Paid time off
Parental leave
Health insurance
Life insurance
Disability insurance
Workers’ compensation insurance
Social Security
Pensions
Tax-advantaged retirement benefits
Pension or retirement contribution matching
Tuition assistance or reimbursement
Relocation subsidies
Meal subsidies
Transportation subsidies
Company housing
Company cars
Wellness programs
Training and development programs

Some of these benefits are optional for employers, while others are legally required. The list of mandated benefits can vary significantly from one country or region to the next.

When selecting optional benefits for your remote employees, make sure to consider which ones will provide them the greatest value, based on their needs and priorities.

The Value of Benefits: By the Numbers

As with base pay, employees seek out companies that provide generous benefits. So, why is indirect compensation important to recruiting and retaining employees? Here are some statistics that display the value of offering strong benefit packages:

92% of employees claim that benefits influence their overall job satisfaction.³
Around 3 in 5 employees say benefits are a top priority when accepting a job.⁴
A 2022 salary survey revealed 83% of employees believe benefits are an essential factor to consider when evaluating a job offer.⁵

Due to their popularity, benefits make up an average of 32% of an employee’s total compensation.⁶

#6 Equity

Equity gives employees partial ownership of their company. Equity packages are often reserved for employees in high-ranking leadership positions, as they can increase their commitment and engagement to the company.

Companies with limited cash reserves, such as startups, are also more likely to provide equity packages to compensate for below-market base salaries.

#7 Stock Options

Stock options give employees the right to purchase a specific number of shares of their company’s stocks at a pre-set price.

Before exercising stock options, employees may need to work for their company for a certain amount of time (typically, three to five years). This vesting period can motivate employees to stay at their company longer.

#8 Flexible Work Arrangements

Hybrid and remote work schedules have become a coveted employment perk in recent years. That’s because these schedules afford employees more flexibility and autonomy, along with a superior work-life balance.

Here are some statistics that showcase the high demand for flexible work arrangements:

97% of employees want to work remotely on occasion.⁷
60% of workers would quit their current positions to work remotely.⁸
Companies with remote workers have a 25% lower employee turnover rate.⁹
Remote workers express 20% higher job satisfaction levels than in-office employees.¹⁰
23% of workers would give up vacation time to work a hybrid schedule.
15% of workers would accept a pay cut to switch over to a hybrid schedule.¹¹

By allowing your employees to work from home some or all of the time, you can boost their job satisfaction and retention.

The best part about compensation for remote workers? It can save your company money in the long run—companies that allow employees to work from home save up to $10,600 per employee each year.¹²

#9 Home Office Equipment

If you employ a remote work model, you may want to give your employees phones, laptops, and other office equipment. Providing this equipment can ensure they have the tools they need to conduct work while away from the office.

#10 Contractor Compensation

The last form of compensation we’ll examine is contractor compensation. This category focuses solely on independent contractors.

Since these workers are not technically employees, their pay structure works a little differently. Most notably, contractors get to set their own rates and work schedules. They can charge for their services per hour, per milestone, or per completed project.

Additionally, contractors are not legally entitled to the same benefits as full-time employees. However, employers may offer to subsidize certain business expenses to entice top contractors to work for them.

How to Choose the Right Compensation Package

As you consider different forms of compensation, it's important to keep your employees’ needs and preferences top of mind. For example, if a notable portion of your employees are planning on starting families soon, parental leave may be particularly important.

You should also conduct market research to see what your competitors are offering in terms of base pay and benefits. This way, you can ensure your total rewards are competitive enough to attract top talent and improve employee retention.

Most importantly, you must ensure that your compensation packages adhere to all relevant employment laws and regulations. Throughout the compensation planning process, collaborate with your human resources team to ensure fair pay for all employees.